Macro and Flows Update: July 2023 - e19

Summary

The video discusses market dynamics, highlighting the significant role of structured products in driving options supply and their impact on market volatility. It emphasizes the importance of understanding macro flows and liquidity models, and how they can influence market behavior. The speaker advises being adaptive and cautious, noting that while current market conditions may be favorable, they could change rapidly. The video also touches on the potential risks and opportunities in the market, urging investors to stay vigilant and prepared for market shifts.

Takeaways

• 📈 The B Supply has been well-maintained despite market declines, indicating a resilient market.
• 🔄 There was an expectation of increased market volatility and potential liquidations following June Opex, but this did not materialize as expected.
• 🚀 The market's reaction to the first week after June Opex led to a more constructive stance on markets, reversing previous short positions.
• 🎇 Holiday-induced buybacks and compressed market timing contributed to increased market support during the mentioned period.
• 💹 The increase in collateral due to a 6.5% market rise significantly boosts market liquidity, especially at the end and beginning of months.
• 📊 The short interest squeeze and positioning in tech names made it an unfavorable time to short the market, leading to a constructive stance.
• 🌪️ Market upswings and increased volatility are being observed, but without volume pinning, the sustainability of these trends is in question.
• 📉 The macro liquidity picture is concerning, with the Fed's actions and Treasury's shortened duration issuance impacting the need to refill the TGA.
• 🔄 There's a deviation in the historically strong correlation between liquidity flows and jobs, indicating a change in market dynamics.
• 📈 The market's upward movement and bullish sentiment indicate a potential topping process, but these signs are not fully conclusive.
• 🔄 The current market scenario is different from the 1970s due to the massive scale of options and derivatives issuance, which has a significant impact on V Supply.

Q & A

What was the state of the B Supply in June according to the video?

The B Supply in June was very well supplied despite the market decline of around 100 points, which was not enough to cause the liquidation that was expected.

Why was there a shift to being more constructive on the markets after the first week of June?

The shift to being more constructive on the markets was due to a combination of factors including holidays leading to significant amount of buyback and supportive flows underneath the market, as well as an increase in market liquidity due to the rise in collateral from the $40 trillion of US equities.

What does the term 'vona charm' refer to in the context of the video?

The term 'vona charm' is not explicitly defined in the video, but it seems to refer to certain market flows or dynamics that the speakers were monitoring, likely related to end of month/beginning of month financial activities.

What is the significance of the short squeeze mentioned in the video?

The short squeeze is significant because it indicates a high level of short interest in certain stocks, particularly tech names or high flyers. This can lead to increased buying pressure as short sellers are forced to buy back shares to cover their positions, potentially leading to a further rise in the stock prices.

What does the video suggest about market behavior around Opex?

The video suggests that there are typically strong market flows leading up to Opex, particularly in the week before and during the Monday and Wednesday of Opex. However, these flows tend to slow down after this period, shifting more towards charm flows.

What is the importance of the 20-day SMA and two standard deviation levels mentioned in the video?

The 20-day SMA (Simple Moving Average) and its two standard deviation levels are important technical indicators used to assess market momentum and potential overbought or oversold conditions. The video suggests using these levels to consider taking positions or making adjustments in market strategy.

How does the macro liquidity picture affect the market according to the video?

The macro liquidity picture is very important as it reflects natural flows coming in and out of the market. The video suggests that current liquidity models indicate a deviation from the strong correlation to liquidity flows that has been observed over the past seven years, which could signal a change in market dynamics.

What is the role of structured products in the current market environment?

Structured products play a significant role in the current market environment by providing an alternative to traditional stock and bond investments. They are tied to derivatives and can offer higher yields based on underlying interest rates, leading to increased issuance and impacting market behavior, particularly in pinning the S&P 500.

What does the video suggest about the potential for a market top?

The video suggests that there are signs of a potential market top forming, such as increased market volatility, bullish sentiment, and positioning changes. However, it also notes that these tops can be difficult to time and capture, as markets can stay irrational longer than expected.

What is the significance of the historical dispersion and correlation levels mentioned in the video?

The historical dispersion and correlation levels are significant as they indicate a deviation from the norm. The video mentions that the correlation of underlying constituents of the S&P was at a historically low level, which is unusual and could be related to the structured products and options market dynamics.

What does the video recommend in terms of investment strategy?

The video recommends being flexible and adaptive like water, going with the flows in constructive windows and taking appropriate positions when necessary. It also emphasizes the importance of understanding the structural realities of the market and having a multi-year outlook, despite potential short-term market squeezes.